Human capital theory was invented as an ideological weapon in the Cold War. Now it is helping to Uberise the world of work
Chicago, 1960. The United States is bogged down in a long, expensive and dangerous Cold War with the Soviet Union. Inside the Economics Building at the University of Chicago, two academics are engaged in a private, intense conversation. Theodore ‘Teddy’ Schultz is tall and lanky. Raised on a South Dakota farm and pulled out of school by his father, he’d still managed to scale the heady heights of academia, first as chairman of the Economics Department in 1944 and then as president of the American Economic Association in 1960. Schultz has strong connections with the Ford Foundation, an important front for CIA programmes during the Cold War.
His younger sparring partner is Milton Friedman who in 1946 joined what became known as the ‘Chicago school’. Although Friedman was of diminutive stature, measuring only 1.52 metres tall, he already enjoyed a fierce reputation as a verbal opponent. Friedman will flirt with the CIA in due course too, training Chilean economists in the art of neoliberal ‘shock therapy’. His know-how came in handy after the US-sponsored overthrow/death of Chile’s Marxist president Salvador Allende in 1973. Richard Nixon said he wanted to hear the Chilean economy scream.
As the two men faced each other in that dark, oak-panelled office, they had a big problem on their hands. University economists were being recast in a new light by US state authorities; no longer bumbling professors (sporting a pipe and tweed jacket) but the creators of ideational weapons, just as important as the intercontinental ballistic missiles being readied at Vandenberg airbase in California. Members of the Chicago school were confident they could make a significant contribution in the struggle.
But how exactly?
Schultz shifts nervously in his leather-bound chair. Economic growth has to be the answer, he avers. Friedman nods in agreement, but quietly frowns as Schultz makes his case. In Moscow, Nikita Khrushchev has just announced that ‘growth of industrial and agricultural production is the battering ram with which we shall smash the capitalist system’. This brazen provocation caused a stir when it was read to the US Joint Economic Committee of Congress in 1959.
Friedman is stony silent – a rarity that Schultz seizes upon to extend his point. There’s a very pragmatic aspect to his plan, too. Not only is growth a ‘hot topic’ following the Khrushchev speech, but a number of powerful technocrats in the US government are increasingly sympathetic to Schultz’s views, especially the Council of Economic Advisers. They’ve been instructed by the Oval Office to devise a growth strategy that will eclipse the USSR and leave it for dead.
Although Schultz holds staunch neoclassical assumptions about growth and development, he learnt from his earlier studies of agricultural productivity that increased public spending on education was absolutely vital to the nation’s growth agenda. It will not only give the US a scientific edge in the space race but also enrich the country’s wider skill reserves, making it more productive and thus beating the Soviets at their own ‘growth game’.
Friedman abruptly interjects. Yes, he intones, the question of economic growth is vital. But public spending is not the way forward. It’s easy to picture Friedman browbeating his weary chairman once again about the evils of ‘big government’ and central planning. The Soviet enemy instead needs to be confronted on strictly US terms, where individual freedom and capitalist enterprise come to the fore. Government is the problem, not the solution. Friedman’s ideal hero is the self-made entrepreneur. He often cited a joke from the vaudeville humourist Will Rogers to cut down his government-friendly critics: just be thankful you don’t get the government you actually pay for!
Here, Friedman is echoing the views of the Austrian free-market zealot F A Hayek, who had joined the University of Chicago in 1950. While exiled in London back in the 1940s, Hayek had written the rabid anti-communist tract, The Road to Serfdom. A condensed version was published by Reader’s Digest and made its author famous. Hayek’s near-fanatical belief in capitalist individualism and all things anti-USSR undoubtedly swayed the terms of the debate that Schultz and Friedman were presently having.
The two academics pause to gather their thoughts. Then the concept of human capital is broached. Possibly by Schultz since it might help to find some common ground with his tiny counterpart. Unfortunately, it proved to be the older academic’s undoing in the debate.
In essence, the idea of human capital wasn’t new. Adam Smith had pointed out long before how the skills and abilities acquired by workers (eg, training, education, etc) can add economic value to an enterprise. But Schultz had only recently become intrigued by the idea. He actively encouraged new faculty and PhD students to build a more robust and formalistic theory of human capital. Legend has it that Schultz suddenly grasped its importance after visiting an impoverished farm. He asked the threadbare owners why they were so content. Because they’d managed to send their children to school, they replied. It would guarantee a secure income for the family long into the future.
Friedman too was fascinated by the notion of human capital, but from a different angle. Some junior colleagues – including Gary Becker, Friedman’s doctoral student who would make his name in this branch of economics – had made some major breakthroughs. One in particular caught Friedman’s eye. Unlike money or equipment, this type of capital cannot conceptually be separated from the individual who owns it. It’s intrinsically part of him. And by extension, someone’s human capital cannot be owned by anyone else since that would be slavery. Therefore, who exactly ought to have the responsibility of investing in it or the enjoyment of its benefits? We gain an inkling of where Friedman stood on the issue from an early paper of Becker’s, in which he showed why it’s irrational for a firm to fund employee training schemes since that same investment might one day literally walk out the door and join a rival....MUCH MORE
